Daily Market Notes Tickmill UK

[Tickmill-News]

There is too much tax uncertainty for US big tech right now. Time for shorts?

In my Monday post we discussed why it may be appropriate to short US Dollar in the first half of January. Yesterday we’ve got the first signal of development of this our scenario. USD index (DXY) fell from 90 points to 89.20 on Wednesday, while EURUSD rose above 1.23, GBPUSD tested a new multi-year high at 1.37 while Gold sticks to its plan to climb above $ 2000, and I think it will succeed. Recall that the key chart I recommended to keep an eye on is the odds of Democratic win in Georgia run-off elections:

Betting odds of Senate elections outcome in Georgia

The likelihood that both Democratic candidates will win the hearts of voters in Georgia rose to 98.04%, up from about 50% on Monday. At the same time, as we can see, the dollar index really sank noticeably. The point is that if the Senate comes under the control of Democrats, the markets will get two medium-term themes for trading:

• The prospect of Democrats pushing through a new large stimulus package;

-The prospect of Democrats raising taxes for corporations and the rich.

The first point implies that the US government will be forced to ramp up borrowing (to fund a new stimulus bill). If holders of US government bonds really expect new bonds to flood the market, they should be inclined to sell them now expecting price declines. As bond yield and prices are inversely related, we should see increase in bond yields as a market reaction. And we do observe it:

Additional stimulus package combined with the Fed’s ultra-dovish forward guidance (keep interest rates at zero until 2023) is an almost guaranteed increase in inflation expectations (and then inflation). Then gold, which hedges inflation risk, should also increase in price what we currently observe as well:

On Wednesday, Nasdaq futures breached to the downside (-1.78% at the time of writing of this post):

If you remember what Biden’s tax proposals included, then it becomes clear that if Democrats gain control over Senate, their plans for income redistribution will hit corporate America. According to BofA calculations, S&P 500 companies will see their profits decline 9.2%, with tech sector suffering the most if Democrats pursue their tax reforms. For big tech companies, potential drop in percentage profit is double digit. Hence the early negative reaction in the futures market, which I believe is far from over. In my view, rising uncertainty about corporate tax policy in the US, stemming from the rising odds of Senate Control by democrats, lends powerful bearish impetus to shares of Apple, Microsoft, Facebook, Amazon, Alphabet, at least in the near term.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[Tickmill-News]

Inflation expectations rise in the US. What does it mean for a new fiscal stimulus?

Judging by the recent developments in the US money and Treasury markets investors start to expect that the Federal Reserve will start to normalize policy sooner than expected earlier. If a month ago a first interest rate hike was expected no earlier than the second half of 2023, this month expectations have sharply shifting closer to present time, pricing in a rate hike at the start of 2023. While consumer inflation in the US is dormant, inflation premium in bond yields is rising very quickly, making it more expensive for the US government to use debt markets to finance new stimulus programs. For example, the interest rate on 10-year Treasuries has risen from 0.92% to 1.15% in just a week since the beginning of the new year:

Investors are demanding higher compensation in bond yields primarily due to rising inflation expectations. If future inflation is expected to rise, then purchasing power of future stream of payments is expected to decline more. Expected average inflation for the next 5 years as measured via 5y5y inflation swap climbed above 2.0%, but Core PCE (the Fed’s preferred inflation metric) is still at 1.4%. The market is running ahead as usual, therefore, if the inflation data for December-January show an acceleration, the market will be hardly surprised as the rise should be priced in:

Although due to discrepancy in expectations and actual inflation, bond markets may express more sensitivity to negative surprises in inflation in the coming months, since in this case the market’s error in assessing inflation will be revealed. If consumer inflation slows, Treasury yields may also quickly adjust downward, while extend its trend upwards.

Inflationary expectations are likely to maintain an upward trend, so discussions in the US Congress of new support measures will certainly imply the participation of the Fed in the form of an increase in QE. Otherwise, borrowing another $ 1 trillion (the estimated amount of fiscal impulse that the Democrats will approve) will be problematic, as future debt service costs will increase significantly. The dovish rhetoric of the Fed is known to be a negative signal for the dollar.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[Tickmill-News]

USDJPY and Biden fiscal plans

There was only a brief pause of stocks in terms of bullish headlines from the US government: starting from the last week, we observe development of the store with a new aid package from the Democrats who have finally grasped full power. The size of the expected support is being revised very quickly: last week Goldman estimated the amount of stimulus at $750 billion (of which $ 300 billion will be distributed in the form of stimulus payments), then there were estimates at $1 trillion, $1.3 trillion, and before Biden’s today’s address to the Americans, the markets are already talking about $2 trillion. Of course, this story roots out any possibility for USD to strengthen and puts pressure on Treasury prices as the market expects a huge portion of the fresh bond supply.

Inflation in the US accelerated in December from 1.3% to 1.4% on an annualized basis, however, as we discussed earlier, the market is not surprised by this acceleration. The acceleration of inflation in the coming months is already reflected in the market inflation premium in bond yields. Comparing the yields of inflation-protected and inflation-unprotected 10-year Treasuries, it is clear that the market expects nothing in terms of interest rates, but expects in terms of inflation:

TIPS yield has changed marginally since October 2020 however 10-year bond yield has more than doubled, from 0.5% to 1.15%.

Weak inflation dynamics would have added weight to the dollar, however, the report played against it.

It was interesting to see the data on the Japanese economy for November and December. As it turned out, the economy was better at weathering through the pandemic crisis in the fourth quarter than previously thought. In general, Japanese assets and the yen look undervalued now, because in general, Japan has grown poorly in the past decade, forcing the Bank of Japan to manipulate rates (not very successfully by the way). Due to the long history of stagnation, investors could be biased about Japanese assets. In terms of data, the key for Japan industrial sector showed good activity in December - industrial orders grew by 1.5% against the forecast of -6.2%. Manufacturing inflation also accelerated - up to 0.5%, ahead of the forecast of 0.2%. If the Biden administration manages to push through the Congress new fiscal stimulus (most likely), one of the main foreign beneficiaries of this event will be Japan, which usually outperforms, but only in the early stages of global reflation. This was the case after the 2008 crisis, when the strengthening reached 80 yen per dollar.

Speaking of USDJPY, from a technical point of view, we are approaching the upper border of medium-term downward channel. Based on the bet that the pair will remain the channel (on the basis of fiscal spending outlook for the US), potential reversal zone could be located in the range 104.50-104.70:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[Tickmill-News]

What to expect from December US retail sales report?

In his Thursday address president-elect Biden announced $1.9 trillion economic recovery plan, but surprisingly, markets were not particularly excited about this. On the contrary, there was some doldrums. American indices closed in the red on Thursday, and the correctional motive has fed into to other markets today. Losses in European markets at the time of writing remain capped at 1 percent, oil quotes are noticeably lower. The dollar has recouped losses. Anticipated fiscal expansion in the US is pushing gold price up despite broad-based strengthening of greenback on Friday.

Jerome Powell said yesterday that it is premature to discuss when the Fed will begin to taper QE. This statement was expected since the Fed has no choice. If the government starts borrowing on the market again, the Central Bank will have to “collect” new debt on its balance sheet to maintain investors’ appetite on the Treasury market. A side effect of this will be an increase in the money supply which is reflected in rising inflation expectations in the US and signs of a bond rout in Treasury market since the beginning on new year.
Powell warned that inflation will start to rise in the second quarter, so if inflation reports show positive aberrations from the forecasts, we still won’t be able to expect a switch to hawkish rhetoric from the Fed.
Claims for unemployment benefits for the previous week showed that the labor market is losing shape rather quickly: the number of initial claims increased from 787 to 965K. This is the highest value since August 2020. The number of continuing claims has also increased - by 141K.

It is no coincidence that Biden said that the repair of economy will start from the labor market - we see that the need for support grows quickly there.

Today the market is expected to be sensitive to the December US retail sales print. Weak NFP prompted investors to expect slowing of consumption in December and hence negative surprise in retail sales. If it turns out that the weakening of the US labor market could not break the consumer potential in the US and the growth of retail sales turns out to be higher than the expected 0%, greenback will likely fall under pressure from revival of risk-on and risky assets will get out of the corrective spiral. The negative deviation of retail sales is likely to be discounted.

Together with the report on retail sales, we expect the report of U. of Michigan to shed light on consumer spending picture in the US. The report will provide estimates of consumer optimism and inflation expectations for December. In November, the consumer confidence index dropped significantly (80.7 points) and is expected to continue to decline in December (80 points). As in the case of retail sales, the negative surprise should have been priced in, but a positive deviation will likely spur demand for risk today, as it will allow revising the effect of the labor market slack in December on the US economy.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[Tickmill-News]

Three reasons for uneven equity markets growth in 2021

Stock indices of advanced economies rose on Wednesday, large ETFs investing in emerging markets saw moderate inflows on Tuesday. The speech of Janet Yellen who assumes the office of the US Treasury secretary affirmed that not only a short-sighted approach will continue in the US fiscal policy, but it may become even more pronounced. Yellen’s remark about the need to “act big” ignoring growing public debt issues was basically a signal that she, as a head of the Treasury, favors further debt accumulation as a remedy for short-term economic issues. It is clear that the US administration will float new measures to support the economy and the goal is to determine who will benefit from the spending spree.

The SPX has gained 13% since the US presidential election and during this leg of the bull market investors priced in both an early end pandemic, thanks to vaccine rollout, and economic rebound in 2021. However, as we enter in the actual phase of recovery market growth will be likely less uniform and investors will become pickier.

There are three reasons for that. First, there is a consensus taking shape that growth stocks are overbought: the gap in forward P/E for growth and value sharply widened in 2020 to the highest level in two decades, indicating that investors have accumulated the highest bias in stock preferences since the dotcom bubble:

Second, value stocks, which good part is cyclical stocks, are expected to thrive in the coming phase of higher economic growth with premium in their prices gradually dwindling. After unveiling the spending plan from the new administration, Goldman Sachs added 2 pp to the expected US GDP growth and forecasts it at 6.6% in 2021. NY Fed forecast currently implies GDP growth at 6.2% in 2021, with signs of acceleration since December 2020:

Markets probably haven’t priced in this momentum yet.

Third, policy moves from the new US administration should benefit the sectors that will drive economic growth and consumption in the future. This also implies more selective investor approach and a focus on firms and sectors that the government will favor. Biden’s plan for innovations includes increased investments in healthcare and green energy, including a move to electric vehicles, which should secure orders for companies such as GM, Ford and Tesla.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[Tickmill-News]

Reflation bet in the US appears to be gaining traction

US futures and European stocks resumed rally anticipating more bullish updates from the new US administration. We saw fresh highs in S&P 500 yesterday and extension of bullish sentiment in today’s session with SPX futures hitting new peak at ~ 3860 point. Recall that we discussed possible reasons of market participants to increase their exposure in US stocks. Breaking down returns of US equity markets by indexes and taking the start of 2021 as the starting point, we see strong evidence that investors are increasing their bets on reflation (economic rebound) in the US economy:

The small caps that make up the Rusell 2000 Index posted a combined 9% return in 21 days, while returns of its peers are much lower - 2-4%. It’s well-known empirical observation that small-caps benefit from early stages of pickup phase of a business cycle and recent market developments clearly reflect the efforts of investors to price such expectations. We also see that tech sector has caught up its peers in recent days, most likely because rhetoric of the new administration is dominated by talk about stimulus and, to a lesser extent, about taxes, regulation and scary things for Nasdaq firms. This helped investors in the index to breathe out. Democrats’ discussion about income redistribution, taxes on rich and corporations should nevertheless begin later when risks for the economy subside.

Consumer prices in the UK came out higher than expected in December, what increased Pound’s appeal in the FX space. GBPUSD saw a brief bout of resistance at 1.37 and from the technical standpoints aims to break through the range with targets at new multi-year highs:

The UK economy, or rather the consumer component, judging by inflation in December, showed pretty strong resistance to a lockdown, which is a surprise for expectations.

The Bank of Japan was unable to salvage long positions in USDJPY, although it said it was too early to abandon its policy of low rates and yield curve control. The dovish stance of the Bank of Japan is factored in yen’s exchange rate and attention of investors is focused on another important factor - fiscal stimulus in the United States. Earlier, we discussed why a fiscal impulse in the US could have a positive effect on Japanese assets, and therefore increase the attractiveness of the Japanese currency.

After weak consumer inflation print in Canada as shown in the report released on Wednesday, the Bank of Canada was expected to express concerns, but it turned out exactly the opposite, which caused USDCAD to move down from 1.2990 to 1.2920. Due to the unusual stance of the Central Bank, the movement along the dovish trend in USDCAD will probably remain in force. As a macro factor, persistent upside pressure in the oil market helps CAD to stay strong. Judging by shifts in exposure in the US stock market (clear overweight in cyclical small-caps), we may also see a preparation for a breakout through local highs in the oil market. But let’s not forget that we have US shale sector which is still alive (despite Biden agenda which is long-term negative for US oil) and the US inventories, according to the latest API update rose for the first time in weeks which is definitely a worrying development for OPEC and oil market participants.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[Tickmill-News]

China – new center of gravity for investors?

Asian equity markets climbed to the levels close to all-time highs on Monday amid expectations that growth in Asian economies will continue to outpace recovery of Western peers. Interestingly enough, the rally in Asian equity markets have notably accelerated compared to US stocks since the start of November 2020:

Comparison of returns of US and Asian stocks via performance of two large ETFs

Optimism in the Asian market was also fueled by the UN report which showed that China surpassed the United States in 2020 in terms of foreign direct investments (FDI). The rationale behind this is that the United States was doing worse and longer in coping with the sanitary crisis, and would therefore underperform compared to China in terms of the pace of post-crisis recovery. Investments in the United States fell 49% year-on-year, while in China they not only escaped a drop, but also grew by 4%, despite a general collapse of direct investment by 42%.

For East Asia as a whole (China, Japan, Korea, Taiwan) FDI decreased by 4% in 2020, while in developed economies - by 69%.

China’s recovery in the fourth quarter accelerated and GDP growth exceeded expectations. The Chinese economy ended 2020 in extremely good shape and despite the continuation of the pandemic is likely to accelerate this year.

Foreign direct investment is an indicator of investor expectations regarding the rate of return that can be expected in an economy over a 5-10 years horizon of investment.

The UN report also supported commodity currencies - AUD and NZD, which through the trading channel are sensitive to changes in Asian economic outlook. They gained 0.3 and 0.5% against the US dollar. In general, trading in the foreign exchange markets occurs today without pronounced trends, since markets are waiting for more information on the stance of the Fed, which will hold a meeting on Wednesday. Investors’ focus is on the way how the US central bank will comment on the government plans to once again seek help from the debt market (to fund the next stimulus package). By the way, despite the absence of announcements of monetary easing, Fed’s balance sheet continues to expand and renew all-time highs:

which supports the stock market and keeps the trend towards compression of credit spreads (markets’ “fear” gauge):

In such situation, it is difficult to imagine what could cause a reversal in risk assets in the near future, where, among the positive catalysts, a new fiscal stimulus in the United States is expected by almost $2 trillion.

The dollar index has every chance of diving below 90 points today, if the vote in Congress on the appointment of Janet Yellen to the post of the head of the Treasury shows strong support from the Republicans. The fact is that in her last speech, Yellen basically said that “while there is an opportunity to borrow (due to low interest rates), we need to borrow”. Therefore, the level of support of Yellen from Republicans will actually reveal the number of headwinds the new stimulus package will meet in the Congress during the voting.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[Tickmill-News]

What does seasonality tell us about equity markets growth in February?

US consumer confidence ticked higher in January, but details of the Conference Board report showed persistent concerns of households about job opportunities. This suggests weak labor market dynamics could extend into January, following negative NFP surprise in December.

Nonetheless, the Conference Board survey showed that US households remain optimistic and are planning to buy real estate and cars within the next 6 months. The US economy is driven by consumption and the data gives hope that the forecasts for economic expansion in the first quarter will justify elevated equity valuations.

In addition to the feeling of overbought in the market, the bullish trend is at risk due to news background turning less rosy. This is a shift in expectations regarding the US stimulus package (towards a smaller size, ~ $ 1 tn., against the expected $2 tn.), and numerous reports that vaccine manufacturers are delaying supplies, which slows down vaccinations, delaying the start of easing of lockdowns. It is worth to pay attention to seasonality factor, which tells us that equity market grows weakly in February, and on average experiences a correction:

The US consumer sentiment index rose from 87.1 to 89.3 in January. It cannot be ruled out that the main merit came from the $900 billion in aid to the economy which the government approved in December, helping economy to avert a hit to propensity to consumption.

In terms of the report’s connection to the labor market, a highly correlated with unemployment rate indicator called labor market differential declined from -1.9 points in December to -3.2 points in January. The correlation with unemployment rate looks really tight:

This useful indicator is calculated on the basis of the attitude of those respondents who believe that there are enough vacancies in the labor market to those who believe that it is difficult to find a job. The decline in the index increases the chances that we will see a negative surprise in Payrolls in February, as happened with the January report. That can be a catalyst for equity market correction.

Worsening expectations for the European economy in line with the latest data on the state of the business climate in Germany, indices of activity in the manufacturing sector and consumer optimism in Germany and France, worsened outlook for European assets. European stocks remain on the defensive, with the Euro down 0.25% against the dollar and about the same against the pound. German GFk Consumer Confidence Index fell from -7.5 to -15.6, indicating an increase in deflation risks. French consumers were also disappointed by the outlook for personal incomes with the index falling short of market expectations in January.

Oil prices were supported by API data, as well as Chinese statistics on new cases of Covid-19, which showed a further decline, thus reducing the risk of new lockdowns. If the EIA data confirms the API estimate for reserves, the price of WTI is likely to try to test $53 today, in part thanks to momentum from Tuesday.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[Tickmill-News]

Why stock markets can fall further, but not for long

The US dollar extends bullish correction entirely on the back of increased volatility in the stock markets. The risk-off on Friday were fueled by an apparent liquidity shortage in China money markets, where the overnight repo rate rose to a 5-year high, presumably also signaling increased credit risk.

The halt of trading in shares that were rampantly bought up by retail investors in recent days calmed markets on Thursday, but today it became known that brokers resumed access to buying, so the hot theme of market cornering and short squeeze of hedge funds has every chance of jolting stock markets again. To justify this, take a look at the following chart:

It shows the value of two portfolios - stocks which have the highest number of short interest (aka “most shorted stocks”) and stocks - favorites of hedge funds. The indices are completely different in terms of composition of portfolios - the first consists of “losers” according to some market consensus (since they were heavily shorted), while the second – good firms with strong potential. It can be seen that in the last few days, especially on January 26-28, the indices mirror each other - when the value of “most shorted” index rises, the VIP index falls. That is, when retail investors rushed to buy shares of hopeless firms, for some reason market favorites fell. How can it be possible? One of the most logical explanations is that hedge funds were forced to sell their favorites from the index below in order to cover their short positions in stocks from the index above.

From the reasoning above, it follows that if hedge funds failed to reposition and close shorts yesterday when trading were halted, resumption of the opportunity to buy losers could allow the army of retail investors to again push the pros to the wall and this could lead to deeper fall in ‘favorite’ stocks, which, as we have already seen, easily feeds into the broader market, which is quite fragile due to weak news background and proximity to historical highs.

However, it is worth remembering that the macro picture has not changed much. Investors continue expect economic rebound in the first half of 2021. The risk described in the article is unique, so long-term correction, in my opinion, can be safely ruled-out. I consider the 3650 level in the S&P 500 (Christmas lows) as a potential entry point upwards. Unless, of course, the market turns around earlier.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[Tickmill-News]

Market short-squeeze is likely to continue keeping broad market under pressure

Asian and European stock indices rose on Monday, while silver surged nearly 10% (5-month high) as investors on social media and chatrooms have apparently set their choice on the precious metal for another pump. The rest of the precious metals complex posted much more modest gains.

The global stock index MSCI All-Country World lost 3.6% last week, but recovered 0.5% on Monday. However, it is still too early to take the rebound as a signal of reversal: inspired by recent success in GME and AMC, retail investors will likely continue raids on outsider shares, devastating short sellers. Goldman Sachs said that ongoing short squeeze was the biggest in 25 years with most shorted stocks almost doubled in just 3 months. Top-50 stocks in Russel 2000 (index small-cap firms) by volume of short positions in open interest rose by almost 60%:

These market trends suggest that the companies combing high volume of short positions in open interest with small market cap, increasingly become the targets for a pump driven by amateur investors, forcing market participants which weren’t lucky enough to be on the short side to seriously worry. According to the latest data, hedge fund Melvin Capital, the most famous victim of recent short squeeze, lost about $ 7 billion last week. In January, the fund’s assets fell by more than half. Another financial institution, Maplelane Capital, was reported by the WSJ to suffer a 45% loss in January (it managed $ 3.5 billion).

According to GS, attacks on the short sellers prompted hedge funds to carry out massive deleveraging last week, pushing equities lower across the globe. However, given that the short-squeeze strategy hasn’t experienced massive failure so far, it’s likely to continue maintain the risk of further downside in the markets.

It should be well understood that the losses of hedge funds and associated liquidation of positions in stocks market favorites (which pulls broad indices down), is only one mechanism of development of correction. The second channel of impact is the wave of withdrawal of shabby deposits from funds, which is apparently gaining momentum. To meet withdrawal requests, hedge funds will be forced to sell assets increasing pressure on the broad market.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[Tickmill-News]

Democrats inch closer to the huge stimulus bill. Should we expect inflation shock?

Both houses of the US Congress approved on Friday a budget plan that effectively deprived Republicans of any possibility of obstructing a new coronavirus relief package. Now, to approve the $1.9 trillion aid, a simple majority (51 votes), instead of the usual 60, will be enough for the Democrats.

Democrats and Republicans shared equally seats in the Senate, but Vice President Kamala Harris has the tie-breaking vote. As a representative of the Democratic Party, she will likely tip the scales in favor of Democrats in the voting on any tough Senate motion.

The news sparked a violent reaction in the markets fueling the rally towards new all-time highs. In line with the ideas we discussed last week, the S&P 500 is preparing to occupy a foothold at 3900.

As the markets celebrate another victory, various economists, even determined Keynesians, are sounding the alarm. The biggest risk is that another boom in government spending could push economy into overdrive, which, on the contrary, will be harmful, primarily by causing a jump in inflation. Already, the commodity price index, closely followed by the US consumer inflation, has jumped 25% over the year, which, given the correlation in historical data, corresponds to consumer inflation of about 4% in the United States:

Of course, in the immediate aftermath of the past recessions, consumer inflation has not kept pace with commodity prices, but the post-2020 recovery has been much faster than in past crises, and the US government intends to directly stimulate consumer spending, which will remove the main barrier to cost-push inflation.

Nevertheless, the head of the Treasury Janet Yellen made it clear that she sees more pain for the economy due to delay and less than necessary stimulus. In an interview over the weekend, she said the central bank has all the tools it needs to keep inflation under control. In her opinion, if the government approves the announced stimulus, the economy will recoup lost jobs by the end of 2022.

Expectations of stimulus measures fuel risk appetite in the markets. As the past stimulus rounds have shown, the consumer in the United States did not have time to worry and turn on austerity mode – government money transfers (“stimmy checks”) was followed by surges in consumer spending, which, as a result, led to an increase in companies’ revenues. Consider the 44% growth in Amazon sales in 2020, despite the consensus that pandemic caused the worst shock in consumption since the Great Depression in the US. Tax risks have not materialized, as the hawkish Democrats have made it clear that they will return to this issue when the economy is on its feet.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[Tickmill-News]

World equities at fresh all-time highs

US equities sustained elevated mood on Tuesday closing near their all-time highs, passing the baton to Wednesday trading. SPX futures tested new all-time high at 3925 today, but trended lower later during London hours. European indices inched higher as well, but with less confidence, as news on lockdowns in the EU hinders “spreading wings”, with no easing of restrictions in sight.

The rally is propelled largely by two growth catalysts – developments on the story with US extra government spending ($1.9 tn. stimulus bill) and quickening vaccinations in the United States.

The MSCI Global Equity Index, which tracks stocks in 49 countries, rose 0.27% renewing all-time record. Investors are not afraid of a potential tipping point, ignoring pronounced risk of overbought, judging by extreme RSI deviation:

After the leg of rapid rally since the start of the February, it would be great to see some intermittent “reset” in the of form of bearish retracement, however, as I wrote earlier, if there is a correction, it should be a quick, short-term, transient shock - it does not seem that the rally since the beginning of February were based on some indecision, on the contrary, it really looks like a new episode of the bull market thanks to the upcoming US stimulus. In addition, the search for yield (growing overweight to risk assets in portfolios) appears to be strengthening consensus in the markets (due to extremely low interest rates), and deviating from this consensus means losing a profit opportunity. Basically, there is nowhere to escape from the market (better place to store wealth) currently.

Among the short-term catalysts for the growth of risk assets, we can note the expectations of favorable hints from the head of the Federal Reserve System Powell, who will speak late tonight. Since the situation with the stimulus package of $1.9 trillion is gradually becoming clearer, signals about participation are expected from the Fed. The US government’s plans for huge new borrowings in the debt market (in order to finance stimulus) are unlikely to please the current holders of government bonds.

The market will wait for signals that the Central Bank will help the government to safely borrow funds on the debt market and avoid unwarranted move in yields. To do this, it will be necessary to “help” investors to absorb government bonds from the Treasury market, which may ultimately lead to an additional increase in money supply and a weaker dollar. Another view on rising money stock in the US is reserves (a form of money) of the US depository institutions with the Fed which continue to rise despite no aggressive QE from the Central Bank:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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Stimulus expectations, jump in US economic momentum put USD under pressure

A key theme of trading on Monday has been renewed rise in market risk-free interest rates in the US. The yield on 10-year Treasury bond after short consolidation near 1.30% mark last week has updated its local high Monday, rising to 1.38%. This led to increased anxiety in equities: US stock index futures tumbled, SPX by about half a percent, Nasdaq by more than 1%.

There are two key channels through which an excessive rally of Treasury yields exerts pressure on equity markets:

• Bonds vs. stocks choice. Some investors start to rebalance their portfolios, dumping stocks and buying bonds as they became cheaper and start to offer meaningful returns. Stocks which have high duration (like growth stocks) are good candidates for replacement by bonds and tend now to sustain more losses;

• Borrowing costs channel. The effect of the rise in risk-free rates feeds into other credit market rates, so it’s reasonable to expect that long-term borrowing costs for firms will rise as well. This has negative effect on shares value as rising interest rates reduce firms’ access to cheap financing.

Nominal interest rates in the US are rising due to expectations of new fiscal stimulus, which in turn will lead to an increase in the supply of Treasuries in the market. Spurred by government spending economic growth should lead to higher inflation, so investors are now also demanding higher compensation for this risk. Comparing yields on 10Yr Treasury Note and bonds with same maturity but protected from inflation (TIPS) we can clearly see the steep rise in inflation premia:

This week, attention will be focused on Powell testimonial in the US Congress. Also, the Fed will release a semi-annual report on monetary policy. Investors will examine the report for clues on the essence of the Fed’s new concept of inflation targeting. It’s still not clear from the Fed communication what should be trajectory or rate of growth of inflation which can enable the Fed to lift interest rates. We are talking about a change in rates on a more distant horizon, but long-term investment assets should be sensitive to the new information, which will constitute a market reaction.

US dollar is expected to continue to drift lower thanks to benign environment for risk-on trading supported by strong US economic data. We saw huge jump in US retail sales in January but still White House administration determined to push new 1.9 tn. stimulus to the Congress. Rising self-sustained economic momentum supported by massive government spending spree in the US should trigger stronger hunt for the yield and inflation fears which is generally negative for US currency.

The technical picture also favors USD slide as we get closer to March:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[Tickmill-News]

Where oil could move ahead of the OPEC+ meeting in March?

Oil prices continued to rise on Thursday with Brent breaking $67/bbl, returning to the level where it traded in January 2020. Powell’s speech this week, in which he said about the need to maintain significant monetary easing, helped oil rally. Additional reports from the US indicated that oil market tightening gathers pace. As it often happened before, traders could easily miss the moment where the market will already start to suffer from undersupply. That is why oil prices are rising in unabated fashion.

The US EIA released its weekly oil inventories report yesterday. One of the key indicators, commercial crude oil reserves, showed an increase of 1.29 million barrels. The rise in inventories is usually associated with a bearish price response. However, the market discounted the reading despite expecting a 5.19 million barrels decline. Why? It may seem that US oil producers quickly restored output, which led to an increase in stockpiles, but this is not the case: in fact, the level of refinery capacity utilization decreased over the week by 14.5% to 68.6%, complicating the clearance of inventories:

This utilization rate is the lowest level since May 2020. Therefore, even a moderate recovery in production could have such an effect on inventories. That is why the release of the data could have a positive effect on the market despite the negative change in headline reading.

Gasoline reserves rose indicating that petroleum demand continues to suffer as cold weather obviously hampers mobility. It’s also a moderately bullish development for WTI prices.

Speaking about the upcoming releases of EIA reports, we can expect that the upward trend in inventories will persist for some time, as production has shown that it can quickly recover, but the refinery’s refining capacity is not. The growth of stockpiles is likely to have minimal impact on the market.

More important for the oil market is the upcoming meeting between OPEC and Russia to discuss the current deal on output curbs. Oil demand is recovering, but the OPEC + deal limits ability of producers to ramp up output, what results in confident growth of prices. Producers, especially the Russian Federation, have a great incentive to gradually lift curbs. Such expectations could drive pullback in prices ahead of the March 4th meeting and there is a risk for some meaningful correction in the market. The situation contributes precisely to sell on rumors (rather than buy), as the risks are clearly skewed in favor of increasing production in response to strengthening demand which should have negative impact on prices or at least make the rally less pronounced.

Technical setup also favors meaningful bearish oil pullback ahead of the meeting:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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Why stock markets Thursday fall is a good buying opportunity

Consolidation of 10-year US bond yields around 1.30% turned out to be a short-lived market state. On Thursday, the yield surged to +1.55% area which brought about a massive knee jerk reaction in risk assets. Investors dumped tech shares with Nasdaq erasing 3.52% of its market cap and SPX losing 2.45% of its value. Aggressive selling began right after the NY opening on Thursday:

On Friday, there are signs of modest downside pressure remaining - European equities trade in the red, futures on US stock trade near the opening exhibiting some correlation with Thursday returns.

What is really important that the outflow from bonds (which led to steep rise in yields) is not limited to the US Treasury market and is a global phenomenon - the yields of German, Japanese, Australian bonds are rising as well, despite yield curve control efforts from the BoJ or the ECB:

The chart shows that expectations of quickening inflation pace and, to a lesser extent, rise of real interest rate are also driving factors in other developed economies, which is the cause of outflows from fixed income instruments.

How long will the bond outflow last and weigh on equities? It’s difficult to give precise answer, but CTA futures positions on major government bond futures show that net short increased to 85th percentile:

In other words, only in 15% of cases since 2009, net short exceeded the current level. Therefore, from a technical point of view, investors should be tempted to buy the dip as the sell-off is quite extreme. In addition, according to JP Morgan on Monday, pension funds will have a rebalancing at the end of this month, about $ 90 billion will be available for investments, and the choice may fall on the government bonds, because they of appealing valuations.

Fed officials Williams and Bostic, commenting on the rally in bond yields, said that it is unlikely that the Fed will somehow react to this move, since it is natural and stems from the reassessment of economic growth expectations due to positive data. They also downplayed the impact of fiscal stimulus on inflation. Judging by Powell’s speech last week, the Fed’s stance on inflation is that the observed inflationary effects are temporary, so no response is required. Consequently, if the FED is correct, the inflation premium in bonds would also need to adjust downward with inflation weakening later.

Let’s hope that 1.5% in 10-year yields will become a psychological borderline and the “pernicious” effect of bond rout worldwide on stock assets will not develop further. A cautious buy on SPX and a short dollar is justified, despite the risk of continued slide in bonds to more extreme levels. All the same, world economy has not yet recovered enough to confidently dump bonds.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[Tickmill-News]

Powell speech, upcoming stimulus talks in Congress should provide additional support for stocks

Orderly sell-off in sovereign debt markets, which flared into massive dump last week, has slowed down on Monday, but is far from over. The 10-year Treasury yield bounced off from a local high of 1.55%, however resumed advance on Monday. It looks like the bond markets entered into a state of short-term equilibrium, but the balance of forces is fragile. The Fed types gave a dry commentary on the rout last week, leaving a lot of understatement. This week there will be a number of speeches by the Fed officials, it is expected that their detailed comments on the rally of risk-free rates will become the main catalyst for movement in risk assets.

Unlike the Fed, the European Central Bank did not stand aside and came forward with “open mouth operations”, hinting at flexibility of the current main program of asset purchases - PEPP. The RBA supported Australian government debt market with concrete actions, boosting bond purchases to enhance control over long-term rates. Considering that world central banks often act in sync, there is a chance that the Fed will also hint at the opportunity, for example, to change composition of monthly QE purchases (by increasing purchases of longer-maturity bonds), which should bring peace to the Treasuries.

Nevertheless, since both inflation expectations and real rate rise in the US, with the exception of negative shocks due to high volatility, this combination should have a bullish impact on world stock markets. At least this is what history suggests:

Macroeconomic news on the US last Friday had in overall a positive tone – consumption expenditures growth (the main inflation gauge of the Fed) accelerated to 1.5% (1.4% forecast), consumer sentiment from Michigan beat forecast. As for the economic calendar this week, the focus is solely on the US labor market data - ADP report, employment component of the ISM service sector activity index. and Non-Farm Payrolls report for February.

Congress is rushing to approve new fiscal stimulus. Biden proposal were approved in the House on Saturday. None of the Republicans voted in favor, but their votes are not needed. Past stimulus measures had bipartisan support, but this time we see a complete split between the parties. It should be borne in mind that the main programs of extended social protection will expire on March 14, i.e., this date is probably an unofficial deadline for the approval of new stimulus. The highlight of the proposal is stimulus checks of $ 1,400 per person (whose income is below $ 75K per year). A good portion of this money, like last time, will likely flow into the stock market. Expectations of an impending positive retail investment shock are also pushing stock indices higher, or at least preventing them from correcting much.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[Tickmill-News]

US appears to be taking lead in the global recovery, driving capital inflows

Oil quotes struggle to retain elevated mood ahead of OPEC+ meeting. Monday rally in equities, Monday rally in equities, which led to the surge of US stock indices by 2.3% on average, failed to underpin commodity prices. On Tuesday, prices stay in a downtrend thanks to strengthening USD and bearish motives in commodity markets in general. While optimism still prevails in the oil market, there are signs that demand growth has begun to weaken with downside risks growing on the demand side. For example, recovery momentum in the manufacturing sector of China, the largest consumer of oil in Asia, continued to fade in January, indicated the data on Sunday:

The latest trade data shows that China is starting to buy less oil, both due to a slowdown in domestic demand growth and as the time of cheap prices has apparently gone. In general, it is reasonable to expect that Chinese demand will move to a plateau, since China stocked up storage facilities in the 3-4th quarter of last year, taking advantage of low prices. The season for refinery maintenance in China begins in the second quarter, which will also hit purchases.
According to Reuters estimates, OPEC oil output, despite signs of strengthening demand, declined in February. Saudi Arabia’s voluntary production cuts drove OPEC’s average production down by 870K in February to 24.89 million barrels per day. The consensus now is that the Saudis won’t extend the gift to the market after the upcoming OPEC + ministerial meeting. In addition, there are expectations that the output quota will be lifted by 500K barrels. Clearly, negative news background builds up for the oil market.
Greenback rally gains traction as the US economy appears to be taking lead in the pace of recovery among developed economies. If in January-early February we had a mix of a relatively weak US economy + expectations of US fiscal incentives + risk-on, now the first component seems to be replaced by a “strong US economy”, which started to draw foreign capital flows into the US assets. Previous risk-on setup contributed to investment outflows from the US in the search for yield abroad, which pressured USD. Now this trend seems to be changing sign. ISM manufacturing PMI for February released on Monday cemented idea of US economic acceleration as it surprised substantially to the upside. The index rose to 60.8 points (forecast 58.8), positive expectations about the labor market were also set by employment component (54.4 points, forecast 53). Apparently, the data release triggered a move in FX:

This week, the dollar is likely to develop corrective momentum upwards. The focus is on the release of PMI in the non-manufacturing sector, the ADP data (due on Wednesday) and the US unemployment report on Friday.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[Tickmill-News]

Negative correlation of Gold with US real interest rate starts to bite the safe haven

European markets rallied alongside US equity index futures as the recent factor of bearish pressure - correction in sovereign debt markets and related volatility of interest rates - faded into the background. The themes of global expansion, bull market in commodities and fiscal impulse in the United States are apparently returning to the forefront.
After a short period of stabilization, the yields on long-term US and German bonds are on the rise again as local Central Banks stand their ground and refuse to contain the rise. And no wonder, in fact, in the past few weeks, the dynamics very desirable for central banks has been taking place in bonds - real interest rate started to rise as well. This is usually associated with “qualitative” economic growth and increasing productivity. Until mid-February, the biggest contribution to the growth of nominal rates was made by inflation expectations, which could have worried the Central Bank, but then the real rate joined the party and immediately soothed concerns. By the way, this is why gold also collapsed, since an increase in the real rate means an increase in gold’s opportunity costs:

Gold has negative correlation with US real interest rate and therefore tend to decline when the interest rate starts to rise.
Although the real rate has risen, it is still deep in the negative zone. It is at a historic low. It has a room to rise more. There are expectations that the rate will continue to rise, since it is believed that global economy is in the initial phase of upturn and related trends in the government bond markets can only start to emerge as well. This should have a negative impact on the Gold’s investment appeal for at least the next quarter or two.
The European STOXX 600 Index rallied for the third trading session in a row, and British assets reacted optimistically to the government’s decision to extend payments to those who lost their jobs as a result of lockdowns.
The data on retail sales and unemployment in Germany made sad adjustments to the expansion story. The forecast for growth of the key item of consumer spending did not materialize - sales fell by 4.5% in monthly terms, against the forecast of +0.3%. It was also expected that the number of unemployed will decrease by 13K, but the number of unemployed, on the contrary, has increased. There has been another mini-shock in expectations for the largest EU economy, which paints an unclear outlook for European assets. European stocks are ignoring the worsening data so far, but for how long? The Bundesbank in its report on Wednesday said it expects a marked decrease in economic activity in the first quarter.
The European currency has experienced difficulties in growing amid negative data and the strong economic outlook for the United States undermines the idea that the dollar will weaken on the upcoming growth in the money supply in the United States due to fiscal stimulus, as an inflow of investors in US assets due to expectations of higher expected returns could start to counterbalance the supply factor. The US labor statistics on Friday will provide more information on the speed and direction of the US economic recovery, but one should closely monitor the emerging trend in the US, as it has every chance of developing into a medium-term strengthening.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[Tickmill-News]

OPEC’s extension of current output curbs is still in cards despite robust demand growth

Greenback advance eased on Thursday as bullish momentum developed earlier in the first half of the week failed to find support in key data releases. ADP report and ISM non-manufacturing PMI published on Wednesday fell short of expectations, although bull run in USD indicated expectations of a positive surprise. The number of jobs in the US in February rose by 117K according to ADP, which is less than 177K estimate. ISM index missed estimates as well with employment sub-index indicating a slight cooling in the pace of hiring. Recall that services sector employs more than 70% of the US labor force that’s why ISM employment survey data is a key for understanding pace and direction of US recovery. If Friday payrolls report misses estimate as well, the contribution of eco data in USD strength will greatly diminish, leaving USD vulnerable to concerns of money supply expansion due to upcoming fiscal stimulus.

There are signs of USD strength on Thursday thanks to bearish mood in US equity futures and European shares. Given the S&P 500’s plans to test 3800 today, USD is likely to extend intraday advance today.

Oil market with little effort digested EIA weekly release on commercial oil stockpiles in the United States. In the week ending February 26, crude oil inventories surged 21.5 million barrels - the highest growth in several years. When the market is in a state of contango (oil futures curve is upward sloping), oil prices often drop on the rise in inventories since inventories are hedged by selling more futures what means less demand pressures in the future. However, current situation is somewhat different: inventories rose mainly because refinery utilization dropped to the lowest level in several decades. During the reporting week, refineries were working almost at half-full capacity - utilization fell to 56%, the lowest level since the 1980s:

At the same time, oil production in the United States extends recovery - in the reporting week, it increased by 500 thousand bbl/d.

An additional point on the report, which neutralized the increase in inventories - a significant decrease in refined petroleum products. Gasoline stocks fell by 13.6 million barrels (forecast -2.3 million), distillates - by 9.7 million barrels. This is partly the result of reduced refinery utilization rates, but the dynamics also speaks of strong fuel demand, which is positive leading indicator for the market.

Oil prices were offered additional support after Reuters reported that OPEC will extend current output curbs until April. In case this outcome becomes reality, prices will likely suffer a strong upside shock, as probability of this event is low based on recent rumors and demand data. In my opinion, if OPEC extends current output settings, this should fuel prolonged price recovery, justifying short-term bets on oil growth.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

[Tickmill-News]

Major global funds could start portfolio rebalancing soon. What does it mean for stocks?

China strengthened investors’ conviction in the global recovery with the latest trade data released on Sunday. The volume of exports gained impressive 60% YoY in January-February period. The reading was way ahead of market projections (40%). The February figure is a huge gain - 150% YoY. Undoubtedly, growth of China exports is also a merit of its trading partners, especially the United States, where economic growth in February could be the highest on record. This can be seen, for example, in the surge of GS Analytic Index to the highest level in many years:

A similar jump is in the NY Fed Nowcast GDP forecast for the 1Q of 2021:

The forecast was revised sharply higher thanks to strong incoming data and now stands at 8.5%. And that’s without taking into account forthcoming government spending stimulus!

Congress approved support measures of $1.9 trillion, but Monday moves in the US futures indicate that approval of the bill apparently has been priced in valuations.

Equities remain under pressure as the stressful situation in US long-term rates has not gone anywhere. Moreover, last week’s events (Powell speech, NFP release) only fueled the trend. I agree that the topic of erratic moves in the Treasury rates has set the tongue on edge, but the markets, in a sense, are now in unchartered waters – the good old Fed which expressed concerns about every ebb and flow in the market, has apparently gone. Therefore, repeated shocks in rates, such as the recent ones, should not be ruled out. We’ve seen their impact on equities and the risk of repeated volatility keeps buying pressure effectively in check.

JP Morgan has discovered another channel of the impact of the recent Treasury selloff on the stock market – coming portfolio rebalancing of large pension and mutual funds. They will most likely significantly adjust the proportions of assets in the portfolio, due to accumulated overweight in equities as well as favorable conditions - stocks became quite expensive while bonds have fallen a lot.

There are 4 big players to watch out for - balanced Mutual Funds (60:40), US Pension Funds, Norwegian Oil Fund and Japan Pension Fund. They make portfolio rebalancing at different intervals, but since some of them have called off the move, there is a risk of combined sell-off. For example, US mutual funds have a noticeable overweight in equity, which sooner or later will have to be adjusted:

JP Morgan estimates cumulative potential outflow from stocks caused by the sale of these funds at $316 billion. Since the event (rebalancing) is more or less likely (the fund’s strategy periodically requires this procedure), other market participants may be inclined to try to get ahead of the whales, which may increase near-term pressure on equities.

Key events to watch this week:

EURUSD – the weekly report of the ECB’s purchases within PEPP (pandemic QE” program) which is due today - will the ECB respond to the rise of EU bond yields? Increased bond purchases by the ECB should have negative impact on the Euro as it will signal that the ECB is concerned. On Thursday - the ECB meeting and again the question, what does the regulator think about the recent moves in bond yields?

USD index - on Wednesday and Thursday - major auctions of 10- and 30-year Treasuries bonds. Week demand on these auctions (low bid-to-cover ratio) will likely add upward pressure on the yields, and vice versa, strong demand will bring welcomed relief to risk assets. Another report to watch is US CPI in February, which is due on Wednesday. Given the latest data on the NFP, a positive surprise is likely and should support upside movement in the USD.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.